As the market cap of cryptocurrencies has grown to the point where mainstream financial industry players are jumping aboard the blockchain bandwagon with greater fervor than ever, and NFTs make headlines (and paydays) for famous and obscure celebrities alike, regulators in Beijing and Washington are ramping up their efforts in the space, each in its own way. In China, the moves are headline-grabbing, interventionist, and as frequently with China, perhaps less than meets the eye. Meanwhile in Washington, the approach is shambolic, incrementalistic and, as always in Washington, heavily influenced by the industry subject to the regulation. But both paths lead to greater government control over the cryptocurrency industries.

On Friday, September 24, 2021, China’s central bank announced that all transactions of crypto-currencies and cryptocurrency mining are illegal, intensifying the country’s crackdown on cryptocurrencies such as Bitcoin. Friday’s statement is the latest and most comprehensive effort yet in China’s commitment to halt cryptocurrency activity in the People’s Republic.

In its announcement, the People’s Bank of China (PBOC) stated that overseas exchanges are barred from providing services to China-based investors and that cryptocurrencies, including Bitcoin, are not fiat currency and cannot be circulated. The PBOC justified its action, stating that such activity “seriously endangers the safety of people’s assets.”

While Friday’s declaration is the latest crackdown, it is not the first. In 2017 China banned Initial Coin Offerings (ICOs), citing financial risk and fraud and shut down local cryptocurrency exchanges. However, trading activity continued through some foreign exchanges. In 2019, the PBOC stated that it would block access to both domestic and foreign cryptocurrency exchanges. And in May 2021, three of China’s financial industry regulators (the National Internet Finance Association of China, the China Banking Association, and the Payment and Clearing Association of China) issued a joint statement banning payment companies and financial institutions from providing services related to cryptocurrency transactions, such as trading, clearing, and settlement. Friday’s statement expands on these prior efforts, making clear that virtual currency-related business activities are “illegal financial activities” and will not be tolerated.

It is difficult to know whether the heavy-handed moves signal a long-term strategy, or are simply a tactic to force the industry into a direction favored by the government. Is China trying to clear the path for its own central bank digital currency, as some have speculated? If so, what room is left for other cryptocurrencies in the world’s second largest market?

Meanwhile, in the United States, the Securities and Exchange Commission (SEC) is also ramping up its enforcement efforts. In August, the SEC charged two executives and their company, Blockchain Credit Partners, for engaging in an unregistered sales of securities and misleading investors concerning the operations and profitability of their decentralized finance (DeFi) business, the SEC’s first case concerning securities using DeFi Technology.

In September, the SEC announced it had filed an action against BitConnect, an online crypto lending platform and its founder, alleging that they defrauded retail investors out of $2 billion through fraudulent and unregistered securities in the form of investments in a “Lending Program.” And on September 10, the SEC issued an Investor Alert on “Digital Assets and Crypto Investment Scams,” reminding investors that “Fraudsters continue to exploit the rising popularity of digital assets.”

Shortly after, on September 14, SEC Chairman Gary Gensler testified in front of the Senate Banking, Housing, and Urban Affairs Committee on the SEC’s agenda, including its enforcement and regulation of cryptocurrencies that constitute securities under federal securities law. In his testimony, Gensler noted a lack of investor protection in crypto finance, issuance, trading, and lending, saying it is “more like the Wild West or the old world of ‘buyer beware’ that existed before the securities laws were enacted.” The Chairman stated that the SEC, working with the Commodity Futures Trading Commission (CFTC) and others, are working to bring more robust oversight and investor protection to the field of crypto finance.

The Financial Crimes Enforcement Network (FinCEN) has also stepped up its enforcement, announcing in August it had assessed a $100 million civil penalty against BitMEX, one of the largest virtual currency derivatives exchanges, for violations of the Bank Secrecy Act (BSA) and FinCEN’s implementing regulations.

The moves by China are a stark contrast to the process in Washington, DC. Regulators here express the need for a greater regulatory hand, but at the same time plead that only Congress and the President may enact new laws for this new technology, something the industry itself insists are needed. And those industry players are actively trying to mold and shape what might emerge from the legislative stew-making that happens in the national kitchen on the Potomac. It is a fascinating case study in opposed governmental systems both addressing a technology meant to make them obsolete in the first place.

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